InFocus: Global Macro 2.0

Canadian CIO speaks out on cryptocurrency mania

Canadian CIO speaks out on cryptocurrency mania

There are few topics in the current investment landscape with the ability to split opinion like cryptocurrencies. Many industry insiders have been highly critical, denouncing the values of cryptocurrencies like Bitcoin, Ethereum and Litecoin as bubbles.

“I can say almost with certainty that cryptocurrencies will come to a bad end,” Billionaire investor Warren Buffett told CNBC in an interview in early January.

On the other side of the debate sit firms like Fidelity Investments. The company is actively looking into how it can take advantage of the cryptocurrency craze and has set up a dedicated Blockchain incubator to explore how it can build and launch cryptocurrency offerings of its own.

Tyler Mordy, President & CIO at Forstrong Global, takes a different view point. He describes the increasing popularity of cryptocurrencies as a mania that is certain to get ugly. “To us, the central boast by crypto-enthusiasts is that, compared to fiat government-issued currencies which can be inflated by quantitative easing, negative interest rates and deflation-phobic central banks, their supply is constrained. Really?” Mordy says.

“We hear about new coins and tokens daily. And, we know the rules in markets: trends, especially in financial innovation, will always be driven to excess. If history is a guide, then, an over-supply issue will instead become the core problem.”

Mordy is in no doubt that Blockchain will be transformative and he believes the technology has the potential to increase efficiency, lower costs and limit fraud. But Mordy also draws a compelling comparison between the cryptocurrencies of today and the technology stocks of the late 1990s.

“During that mania an oversupply and overvaluation of every stock with a “dot com” suffix became the issue,” Mordy says. “Eventually, the mania collapsed under its own weight and most companies didn’t directly profit. In fact, most of them don’t exist anymore. But the game changer was the internet and its infrastructure. That did truly transform the world as we know it. The same will happen in crypto land.”

Mordy is keen to remind investors that effective investment strategies start with an understanding of present and future value. Speculation, Mordy says, begins with a premise that others will pay more for it in the future, with no regard for intrinsic value. It’s a strategy that he strongly advises investors to avoid.

“The good news is that when this mania subsides the collateral damage should be limited, simply because of the lack of credit and leverage involved,” Mordy says. “That means the banking system will not be damaged and spillover effects into the economy should be relatively minor. Ironically, the instability of the crypto-world may even bolster confidence in traditional money and banking.”

 

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Founded in 2001, Forstrong Global Asset Management Inc. manages money on behalf of individuals, financial professionals and institutions. Our multi-asset global macro thematic approach has demonstrated the ability to safely steward client assets through challenging markets and economic environments. Forstrong is part of the Industrial Alliance Insurance and Financial Services Inc. (TSE: IAG) family of wealth management companies, which together serve over $100B in client assets.